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Jun12

Second-Hand Games Explained

Since I am a fan of video games, I do spend a little bit of time researching some of the workings of the industry surrounding it. Frequenting website that cover it exclusively, I’m dumbfounded at just how little of the economics of the industry these sites understand. And sometimes it’s about how willfully ignorant they choose to be. For example, the used game debate has been revived in the wake of confusion over the reveal of new game consoles. What frustrates me the most is the lie that has been floating around for the majority of this past generation that the second-hand market takes money out of the pockets of development studios and publishing companies. No, no……no. Not only is this false, it doesn’t even make sense when you think about it. It implies that a company would hand over a product to a distributor, only receiving payment in the form of royalties. This is only the case if you are independently funded. But for those not primarily distributed on Steam, let me explain.For all intents and purposes, a development studio is a more sophisticated team of software programmers. For anyone working a 9 to 5, either contracted or pro-bono, no one would ever perform the task with payment withheld until the product was sold. The whole purpose of using a publishing company, in any form of entertainment, is to provide the necessary cash to cover the production costs, including salaries of team members. It’s just inefficient for a large project to fund itself any other way.After completion the product is sent to retailers in shipments. Because the majority of sales occur in the launch and 2nd months on the market, if certain benchmarks aren’t hit by this point, it’s less likely that additional shipments will be ordered. Based on the nature of the contract for the product, if the number of units shipped covers the sunk cost bonuses should kick in for the development team. It’s important to note that all the products are paid for up front persons receiving them (a retailer would never sell you a game then wait a week for you to pay for it). Retailers do have a few tools gauging demand. Pre-orders have long been a great source of understanding some of the market demand. Likewise, marketing materials sent from publishers give an indication of how many units are predicted to sell. This is important because, as everything has been paid for up front, a retailer is on the hook for unsold units. This means that while the retailer take was factored into the launch price, they stand to lose significant money from a reduced price sale.So if we review here, the only place the development studio stands to make money is in the first two months. And used game sales in this period are more of a criticism of quality than an indictment of a pushy retailer. Industry guru Michael Pachter has even said that used game sales are almost a wash when accounted for trade-in credit used on new purchases. And the same logic for a new copy reducing price can be applied to a pre-owned sale. Sunk cost makes no indication of what the sale price will eventually be.This isn’t meant to be a defense of second-hand retailers; Gamestop is a corporation just like any publisher. It’s just that their interests happen to align with the consumer base. It’s always easier to align with an enemy who looks you in the face than one who disregards your existence. The difference between trade-in value and selling price is the convenience tax you pay for not re-selling the game yourself. And a Furniture company doesn’t come to your yard sale to demand royalties for a sold couch you already paid them for, so how dare a retailer double charge for a single item.In the end, a pre-owned sale only affects a retailer who chooses not to sell a used game. When the industry blame-shifts and misleads their consumer base in this way, is any wonder how it got so bloated. Without an understanding of diminishing returns, project overhead spirals out of control without anyone to point the finger of blame at but those making the decisions.

Posted by diver216 on 12 June 13 at 04:26
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